economy insight - august 2010

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North America INSIGHT

August Update: U.S. Economic Indicators & Projections

Key Findings:

• Economic indicators suggest that the economic recovery is turning lukewarm. It is not unprecedented for the economy to recover at a rapid pace immediately following a recession, driven by effects such as changes in inventory levels, only to cool off a bit before resuming its long‐term pace. The Economic Cycle Research Institute (ECRI) notes that recent trends in its Weekly Leading Index suggest a slowdown, but is not making a recession call at this time. While we do not expect a double‐dip recession, the overall magnitude of the slowdown is in question. One of the few favorable developments of late is that large companies are generally reporting better than expected earnings. Although companies are making money again, they are hoarding cash as the economy still feels shaky. An environment of economic certainty, but nevertheless increasing demand, could be a favorable climate for contingent employees as companies can meet increased demand without making long‐term commitments to SG&A expense.

• The economic indicator graphs on the following pages continue to show gray shading, as if we are still in a recession. Does SIA believe that is the case? No. We agree with the consensus that the recession likely ended in the summer of 2009, but we will continue the gray shading until the National Bureau of Economic Research determines the date the recession ended.

August 5, 2010

Tony Gregoire, Senior Research [email protected]


August Update: U.S. Economic Indicators & Projections– August 5, 2010 2

ECRI’s Weekly Leading Index

• The Economic Cycle Research Institute (ECRI) tracks a basket of leading economic indicators through its Weekly Leading Index (WLI). After declining in May and June, there appears to be an uptick thus far in the WLI for July. The reading for the week ending July 23 was 121.1, the highest reading in four weeks. However, the WLI’s annualized growth rate has fallen to ‐10.7%. The recent sharp fall in the growth rate shown in the graph to the right indicates that the U.S. economy is expected to slow down after robust growth earlier in the year. The WLI growth rate is based on a four‐week average, and can be negative the same week the WLI increases.

• A slowdown after a strong initial burst is not uncommon in an economic recovery, though. Generally, in the early stages of a recovery, restocking of inventory drives a strong initial burst in economic activity. Once inventory levels stabilize, the recovery cools. The last page of this report discusses the influence of changes in inventory levels on recent fluctuations in GDP growth.

• While it is difficult to determine how much of a slowdown is portended by recent trends in the WLI growth rate, ECRI stated in a report released August 4 that it is not making a recession call at this time.

ECRI WLI Annualized Growth Rate

Source: Economic Cycle Research Institute (ECRI)

‐35%

‐25%

‐15%

‐5%

5%

15%

25%

35%

Jun‐00 Jun‐02 Jun‐04 Jun‐06 Jun‐08 Jun‐10

WLI Ann

ualizae

d Gro

wth Rate



The Conference Board’s Leading Economic Index

• The Conference Board tracks its own basket of leading economic indicators through its U.S. Leading Economic Index (LEI). The LEI decreased from 110.0 in May to 109.8 in June. The year‐over‐year growth rate decreased for the third consecutive month, from 9.8% to 8.6%.

• The Conference Board noted, “The average workweek, supplier deliveries and stock prices made the largest negative contributions to the index this month, more than offsetting the positive contributions from the interest rate spread and real money supply.”

• The Chief Economist at The Conference Board noted that current trends in the index point to “slower growth through the fall” as inventory rebuilding slows in the industrial sector and the service sector shows little indication of a pick up.

Leading Index 12 Month Percent Change

Source: The Conference Board

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

10%

12%

14%

Jun‐00 Jun‐02 Jun‐04 Jun‐06 Jun‐08 Jun‐10

LEI 1

2‐M

onth

Per

cent

Cha

nge



PM Manufacturing Index

• Data released August 1 from the Institute for Supply Management (ISM) suggest a deceleration in growth in the manufacturing sector over the last few months, which is not that surprising as demand from changes in inventory has subsided.

• The Purchasing Managers Index (PMI) for manufacturing registered 55.5 for June. A reading above 50 generally indicates an expansion in the manufacturing sector of the economy. Though the June reading suggests a twelfth consecutive month of growth, it also indicates a decleration in growth since April, which had a reading of 60.4.

• The employment index (EI) suggests relatively strong growth in manufacturing employment. Initially, the recovery in the EI lagged that of the PMI, but now the EI has the higher reading. The EI’s reading of 58.6 for July suggests an eighth consecutive month of growth in manufacturing employment, as well as an acceleration from the June reading of 57.8.

Purchasing Manager’s Manufacturing Index

Source: Institute for Supply Management (ISM)

25

30

35

40

45

50

55

60

65

Jul‐00 Jul‐02 Jul‐04 Jul‐06 Jul‐08 Jul‐10

Inde

x

Recession

PMI

EI



PM Non‐Manufacturing Index

• The PMI for non‐manufacturing registered 54.3 for July, suggesting growth in the sector for seven consecutive months. A reading above 50 generally indicates expansion in the non‐manufacturing sector of the economy.

• After climbing above 50 for the first time in twenty‐nine months with a reading of 50.4 in May, the non‐manufacturing employment index has hovered around 50 this summer, with a reading of 50.9 for July. After months of heavy declines, the index is currently suggesting a slow recovery in non‐manufacturing employment.

• The PMI suggests that non‐manufacturing companies are experiencing demand but the EI suggests they are still somewhat reluctant to hire. Firms that need workers, but are reluctant to commit to a non‐contingent might be more amenable to using contingents.

Purchasing Manager’s Non‐Manufacturing Index

Source: Institute for Supply Management (ISM)

25

30

35

40

45

50

55

60

65

Jul‐00 Jul‐02 Jul‐04 Jul‐06 Jul‐08 Jul‐10

Inde

x

Recession

PMI

EI



Trend in Initial Unemployment Claims

• If the recession is over, why does the trend in initial unemployment claims remain stubbornly high? One can take mild comfort in the fact that we have been here before. The second recession of the early 1980’s lasted from July 1981 to November 1982. As the recession drew to a close there was a strong march downward until a plateau was hit near 450,000 that lasted for nearly half of 1983.

• Similarly, claims strongly marched downward in the summer of 2009, when the last recession likely ended. However, claims have since bobbled around 450,000 for several months. If 1983 is repeating itself, the trend should resume its march downward shortly. The recession of the early 80’s is in many ways a more suitable comp for the 2007‐2009 recession because they were both severe. The recessions of 2001 and 1990‐1991 were mild by comparison.

• It is difficult to tell what effect the recent scaling down of census workers has had on keeping initial unemployment claims high. Unemployment benefits for census workers is determined on a case‐by‐case basis by the worker’s state unemployment office.

Source: U.S. Department of Labor

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Jan‐81 Jan‐82 Jan‐83 Jan‐84

Initial Claims for Unemployment (4‐Week Moving Average)

We are here…again

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Jul‐00 Jul‐02 Jul‐04 Jul‐06 Jul‐08 Jul‐10 Initial Claims for Unemployment (4‐Week Moving

Average)

Initial Unemployment Claims (2000‐2010)

Initial Unemployment Claims (1981‐1984)



GDP Estimates and Projections

• On July 30, the U.S. Department of Commerce released its advanced estimate of real U.S. GDP for 2Q10 and revised estimates for prior quarters. By their estimates, the economy grew 2.4% in 2Q10 on a seasonally‐adjusted, annualized basis. That reading represents a deceleration from 3.7% growth in the prior quarter, as shown in the graph to the right.

• However, the graph to the right also shows that once the change in real private inventories is excluded, the recovery is less rocky than otherwise suggested. In fact, GDP growth actually accelerated from Q1 to Q2 when inventory is excluded. Inventory levels grew in the second quarter, but at a slower rate than in the prior quarter, making a substantially smaller contribution to GDP growth in Q2 than in Q1. Recent backpedaling in some of the economic indicators noted in this report is driven in part by inventory.

• Excluding inventory from GDP trends gives a picture of the underlying, structural health in the economy that is more indicative of trends we should expect as the economy continues its slow recovery. In a report released July 30, The Economist Intelligence Unit (EIU) noted its projection of 2.0% growth for 2011 and described it as “below consensus.” The Conference Board projects 1.9%. The median projection from the most recent Wall Street Journal Survey of Economists was a more optimistic 3.0%.

U.S. GDP growth projections3Q10 4Q10 FY10 1Q11 2Q11 FY11

EIU n/a n/a 2.7% n/a n/a 2.0%Conference Board 1.8% 1.4% 2.8% 1.4% 2.1% 1.9%WSJ(1) 2.8% 2.8% 3.0% 2.7% 3.0% 3.0%(1) Median of all responsesSource: The Economist Intelligence Unit ‐ July 2010, The Conference Board ‐ July 2010, The Wall Street Journal ‐ July 2010

GDP Growth and Inventory Levels

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

GDP Growth

GDP growth GDP growth (excluding inventory)

Source: U.S. Department of Commerce

economy insight - august 2010

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